Latin America Economic Forecast

Economic Snapshot for Latin America

April 22, 2015

Latin America experiences fourth consecutive year of deceleration in 2014

Latin America’s bumpy ride throughout 2014 ended with lackluster growth in the fourth quarter. The latest and more complete GDP data released by national statistical institutes and central banks across Latin America showed that the region’s economies grew at different tempos in the last quarter of 2014. While the economies of Argentina, Chile and Mexico gained momentum in Q4, economic activity in Colombia, Ecuador, Peru and Uruguay decelerated. Meanwhile, Brazil’s economy decreased for a second consecutive period in Q4, although the pace of contraction was more moderate than in the previous quarter. The broad spectrum of results highlights the notable divergence in growth among Latin American economies. The regional GDP estimate (excluding Venezuela, which hasn’t yet published fourth quarter figures) showed that Latin America’s economy expanded 0.7% in the fourth quarter, which was a mild improvement over the 0.6% increase registered in the previous quarter. In the full year 2014, the region grew just 1.1%, which was well below the 2.9% increase tallied in 2013. 2014’s result also marked the fourth consecutive year of deceleration.

Many major Latin American currencies continued to experience strong volatility against the greenback in the first quarter of 2015, owing largely to changing expectations regarding the U.S. Federal Reserve’s monetary tightening cycle, which is foreseen happening later in the year. Moreover, the combination of lower commodities prices and each economy’s particular vulnerabilities exacerbated the volatility in the foreign exchange markets. Should weakness in Latin American currencies persist this year, it will negatively affect imports in the region. Nevertheless, if the depreciation in currencies continues, it will benefit exporters as overseas sales will become more competitive. Regarding borrowing costs, many Latin American governments have historically been hit hard by sharp currency drops. In addition, inflation will be a concern in many economies as pass-through effects from weakness in the currencies could prolong inflationary pressures.

Region faces fifth year of deceleration; growth divergence persists between Atlantic- and Pacific-facing economies

The outlook for Latin America deteriorated again in April and marked a 10th consecutive downward revision. Economists participating in the LatinFocus Consensus Forecast cut the region’s GDP growth projection from the 0.8% expected last month to 0.6%. Economic growth at this rate would represent a deceleration over the 1.1% increase registered in 2014 and would mark a fifth consecutive year of tepid growth. April’s downward revision reflects lower growth forecasts for 7 of the 11 economies surveyed, including the region’s giants Brazil and Mexico. Projections for Ecuador and Uruguay were left unchanged, while Argentina and Chile were the only economies for which panelists raised their forecast. For 2016, panelists see Latin America’s GDP increasing 2.3%.

Many Latin American economies will continue to face increasing growth divergence this year, which is neatly defined by the two oceans that envelop the region. The Atlantic-facing economies of Argentina, Brazil and Venezuela—the largest members of the Mercosur bloc—will contract 0.2%, 0.9%, 5.5%, respectively, according to LatinFocus Consensus Forecasts panelists. On the other side of the continent, Chile, Colombia, Mexico and Peru—which make up the Pacific Alliance—will expand 2.9%, 3.4%, 2.9% and 3.5%, respectively. 

This division has little to do with the western countries’ orientation toward a more dynamic Asia and the eastern countries’ exposure to the European economies, which are still weak. In fact, the growth divergence is mainly the result of the substantial differences in each country’s economic policy during a decade-long economic boom, which was fuelled by high commodities prices and strong inflows of foreign direct investment. Throughout the boom years, Atlantic countries spent more and saved less, while the Pacific-facing countries invested more. Moreover, many governments in the Atlantic-facing countries implemented more interventionist economic policies, which put a dent in businesses’ profits and discouraged investment. Conversely, countries bordering the Pacific undertook agendas of economic reforms, which investors welcomed. 

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BRAZIL | Economy ekes out anemic growth in 2014; outlook for 2015 is grim 

Brazil’s economy expanded a meager 0.1% in 2014, just managing to eke out growth. The result is notably below the 2.7% expansion recorded in 2013. Latin America’s largest economy has slowed down drastically since 2010’s 7.6% growth and more recent data suggest that the economy continues to worsen. Industrial production contracted in February and the manufacturing PMI fell to the lowest level in over three years in March. In the political arena, President Dilma Rousseff appointed Vice President Michel Temer to be her lead negotiator with Congress in an effort to ease tensions within her coalition government. Temer is the president of the Brazilian Democratic Movement Party (PMDB), Rousseff’s largest coalition partner, and tensions have risen between Rousseff’s Workers’ Party and PMDB over the Petrobras scandal.

Brazil’s downward trajectory is expected to continue this year. Our panel of analysts foresees the economy contracting 0.9% in 2015, which is down 0.3 percentage points from last month’s forecast. For 2016, panelists see the economy rebounding and growing 1.3%. 

MEXICO | GDP likely lost momentum in Q1; mid-term elections to determine extent of budget cuts

The Mexican economy picked up speed in the final quarter last year, driven by strengthening domestic demand and a higher contribution from net exports. However, the first indicator reports for the current year send mixed signals about the health of the economy. On the political front, Mexico will hold mid-term elections on 7 June for the Chamber of Deputies as well as for local legislatures in 16 states. The composition of the Chamber of Deputies will determine the size of the expenditure cuts in the 2016 budget. Should the Institutional Revolutionary Party (PRI) and its allies retain their majority, the government is expected to implement further cuts, which will likely affect social programs more than infrastructure spending.

Mexico’s growth prospects are positive, but downside risks to the outlook do persist. Although the economy will benefit from the recovery in the U.S. economy, lower oil prices are taking a significant toll on public finances, thus forcing the government to cut spending. LatinFocus Consensus Forecast panelists expect the budget cuts to have only a marginal impact on growth and lowered their 2015 GDP growth forecasts over the last month by 0.1 percentage points to 2.9%. In 2016, the panel expects the economy to expand 3.4%. 

ARGENTINA | Despite debt conundrum and distortive policies, economy manages to grow in 2014

Despite continuing macroeconomic imbalances, distortive economic policies and the ongoing holdouts saga, official data released on 20 March indicate that the economy grew in the final quarter of last year, posting a mild 0.5% growth in the full year 2014. This pleasant surprise coupled with expectations of a substantial change in economic policies after the October presidential elections seem to have sparked renewed optimism among both consumers and investors. Consumer sentiment climbed to an over-three-year high in March, while investors have been showing increased interest in the country in recent weeks. Speculation that interventionist government policies will be reversed and the holdouts saga resolved after October elections has led to significant gains both in utilities firms’ debt notes as well as in government bonds. Recent surveys show opposition candidates Sergio Massa (Frente Renovador party) and Mayor of Buenos Aires City Mauricio Macri (PRO party) leading the polls.

Expectations that a new and more pragmatic government will take office in October seem to be driving more optimistic forecasts for 2016. Latin Focus panelists expect GDP to contract 0.2% this year, which is up 0.1 percentage points from last month’s projection. For 2016, our panel sees the economy rebounding and expanding 2.1%. 

VENEZUELA | Recession deepens, inflation soars and slide in oil prices add pressure on government finances

The economy entered recession in 2014, after recording three consecutive contractions, from Q1 to Q3. Adding to Venezuela’s woes, inflation skyrocketed last year. The sharp drop in the price for oil has put the government’s finances under pressure as oil revenues represent the vast majority of Venezuela’s dollar income. Moreover, increasing cash shortages are escalating Venezuela’s economic crisis. In response, on 10 April, the government announced additional tightening of capital controls, reducing the amount of foreign exchange available to Venezuelan travelers from USD 2,500 to USD 700.

Venezuela’s outlook for 2015 is worsening quickly. The economy remains in a downward spiral amid recession, elevated inflation and a severe credit crunch. Against this backdrop, LatinFocus Consensus Forecast panelists shaved off 0.6 percentage points from last month’s projection and now see a 5.5% contraction in GDP for 2015. For 2016, the panel sees GDP falling 1.2%. 

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INFLATION | Inflation pressures begin to fade but expectations rise

According to preliminary data, inflation in Latin America stabilized at February’s 12.3% in March. That said, double-digit inflation persists in Argentina and, although official statistics have not been released, inflation in Venezuela continue to soar. LatinFocus panelists expect regional inflation to end 2015 at 16.7 % (previous estimate: 16.3%). The upward revision reflected a broad-based increase in the inflation forecasts. Meanwhile, in Venezuela, inflation is expected to end 2015 above 100%. In 2016, LatinFocus panelists expect the regional average to end the year at 11.3%.

Written by: Ricardo Aceves, Senior Economist

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